NEW YORK (TheStreet) -- The current buzz surrounding Janet Yellen's latest press conference seems to be focused on the "about six months" gaffe Yellen gave when she was pushed on a time frame for raising interest rates.
But that is relatively unimportant.
What is much more crucial is what she didn't say. How is she going to deal with the $2.5 trillion excess reserves liquidity overhang in the financial system?
These excess reserves were created when the Fed began quantitative easing back in 2008. They keep rising because the rate of asset purchases has far outpaced the rate of bank loans since then. Tapering has done nothing to slow it down. The consequences of those excess reserves entering the economy could be extreme. But nobody mentioned them.
What would happen if this liquidity were to suddenly enter the system? Does the Fed have a plan to drain it? What would happen if it tried? How does QE accomplish anything if all of the money is simply being piled up unloaned, outside the economy?
What did we hear about this? Not a word. Yellen's introductory remarks didn't mention it, and nobody touched on any of these issues during the Q&A session.
There is only one reason that banks are not loaning out the money the Fed is printing. The risk of loaning it out simply isn't worth it. Current low interest rates can't compensate for the risk of loan default.
In order for those excess reserves to enter the economy, interest rates are going to have to go up. At that point, banks may start taking the risk of loaning out the QE money. At that point, Yellen will find herself in a serious conundrum. Either she can allow that to happen and risk serious price inflation as $2.5 trillion in QE enters the system, or she can start to drain the excess by selling bonds, keeping inflation under control.
Either way, the bond market is headed for a serious shock. Rates have been trending higher since June 2012, regardless of QE, and there is an interest rate tipping point somewhere along the yield curve at which point huge amounts of excess reserves will start to enter the economy. Tapering, even if she tapers down to zero, cannot get rid of the extra liquidity that is already there.
If Yellen does nothing at that point and just lets the liquidity flood in, inflation will soar, pushing rates up. If she decides to drain the excess by selling bonds, rates go up. There is no way out. The only question is: When comes that tipping point?
With Obama and Putin declaring financial war on each other and the latter holding $132 billion in U.S. Treasuries, the answer may be soon.
But the real answer is, don't try to time it. Just get out of bonds.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.